H-P CEO needs to please investors, workers

Commentary: Apotheker’s in a tough spot to make both happy

SAN FRANCISCO (MarketWatch) — Both investors and employees have heard the broken record before: Hewlett-Packard Co. has lost its way, lost its soul, lost its ability to innovate.

They heard a version last week from H-P Chief Executive Leo Apotheker, in his coming-out party with Wall Street, industry analysts and the press. As he unveiled what has been called an evolutionary strategy for H-P
HPQ, -1.74%
Apotheker, who started last Nov. 1, distanced himself from his two recent predecessors but also voiced some of their similar laments.

When asked about the morale of employees by one analyst, Apotheker said it was not good when he arrived, but that things had improved since his arrival. “I’ll be candid about it,” he added. “It wasn’t very good,” noting that H-P had been in turmoil after the abrupt departure of his predecessor Mark Hurd. “I think it’s becoming better, subjectively speaking.”

The conundrum for H-P’s leader is one facing every CEO of a publicly traded company: Can he appease Wall Street and its love of earnings, as well as employees, who want to develop good products and be proud again to work at H-P?

Apotheker has made some moves that have won over some in H-P’s workforce, such as eliminating pay cuts. But Wall Street has a wait-and-see attitude, after a lackluster earnings forecast last quarter.

Investors, accustomed to Hurd’s earnings machine, drove H-P shares down when he left in the wake of an expense-accounting scandal and claim of sexual harassment. H-P’s stock lost billions in market capitalization when Hurd resigned amid allegations of improper conduct. By mid-February it had recovered, only to drop again after the company’s disappointing outlook when it reported earnings Feb. 22.

H-P’s rather “amorphous” strategy, as Jason Maynard of Wells Fargo Securities called it, isn’t helping much either. Last week, H-P shares slipped just below their lowest level since Apotheker became chief, but bounced back Monday.

“Gaining confidence in the (relatively) new CEO will take some time, and we believe that the catalyst for the stock would be its next earnings results in May,” wrote Kaushik Roy, a Wedbush Securities analyst, in a note.

Apotheker’s strategy included a bigger emphasis on cloud computing, offering cloud services to customers, a big push of H-P’s webOS software that will include personal computers, plans for an applications store and no intentions to buy legacy software firms or giants like SAP AG
SAP, -1.52%Read more about H-P’s latest strategy.

But others were dismayed by the lack of specifics on how H-P plans to grow the software business, especially since Apotheker came from SAP.

“It could be that the lack of detail was a matter of playing their cards close to the vest, rather than having no hand at all,” according to Charles King, an analyst with Pund-IT Inc.

“Perhaps H-P currently has deals in the works that loose lips could potentially sink — at least one hopes so,” he said, adding that even though H-P has a decent selection of systems-management tools and applications, its revenue from software is a “fraction of what IBM
IBM, -1.26%
and Oracle
ORCL, -1.42%
enjoy.”

Maynard of Wells Fargo noted that H-P currently has some “nice foundational assets to build upon, but just doesn't have the scale to compete against pure-play software vendors or generate enough value-added IT services, in our view.”

H-P will be focusing on next-generation solutions, but Maynard said the challenge is that “next-generation solutions won’t create enough incremental revenue to positively impact the financials.”

One move by H-P that both employees and investors wanted to hear was the company’s stance on research and development. Chief Financial Officer Cathie Lesjak vowed to increase R&D spending, which had declined in the last decade under both former chiefs Mark Hurd and Carly Fiorina. Lesjak didn’t give any details, only to say the spending would outpace revenue growth — estimated to grow around 4% in fiscal 2011.

Apotheker, for his part, told reporters in the press briefing after his remarks that investing in R&D “is not just measured in dollars.” He said it was also about effectiveness and about “bringing it to market.” When asked about what technologies H-P might need to complete its cloud-services offering, he said that some of them would come from H-P Labs.

At a time when innovation itself is seen by some as generally on the wane, and even more so at large companies, it is an audacious remark. Yet it’s not clear whether H-P is coming too late to cloud services, where it will compete with companies like Amazon.com Inc.
AMZN, -1.80%
and Microsoft Corp.
MSFT, -1.70%

Can Hewlett-Packard generate customer interest in that highly competitive field, or will it compete on cost and hurt its margins?

If H-P is able to commercialize more of its internal innovations, that’s one way to appease its disparate groups, depending on whether the payback is more than incremental or whether the inventions distinguish H-P from the competition. After all, employees who want a promising career are also H-P shareholders.

Apotheker has some of the right ideas. But time will tell if the holes in the plan will be patched by some surprise software deals that excite investors and don’t alienate employees.

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